Stockholm (Ekonamik) – Saudi Aramco announced the international launch of its US$12 billion inaugural bond. The issuance is comprised of five tranches of senior unsecured notes under Saudi Aramco’s Global Medium Term Note Program. The funds were expected to go towards funding Aramco’s acquisition of 70% of SABIC from the Public Investment Fund (PIF), led by Crown Prince Mohammed bin Salman.
The tranches have maturities of 2022, 2024, 2029, 2039 and 2049, paying coupons of 2.75%, 2.875%, 3.5%, 4.25%, and 4.375%, respectively. The 2024, 2029, and 2049 notes were issued at 99.139, 99.516 and 98.553 discounts, according to Cbonds. The offering is expected to close on 16 April 2019, subject to customary closing conditions. The Notes will trade on the London Stock Exchange’s Regulated Market and be admitted to the official list of the United Kingdom Listing Authority. The bonds reportedly received bids totalling US$ 100 billion.
The case for the Aramco Bond
According to the bond prospectus, the deal was arranged by JP Morgan, Morgan Stanley, Citigroup, Goldman Sachs, HSBC and NCB Capital Company. Aramco has been given a long-term issuer rating of A1 by Moody’s and A+ by Fitch. The same document reported that Aramco made US$111.1 billion in net income in 2018, up from US$ 76 billion in 2017 and US$ 13.3 billion in 2016. The increase in profitability in 2018 was “primarily due to improved profitability of the upstream segment, which was partially offset by lower profitability of the downstream segment. The decreased profitability of the downstream segment during this period was due to pressure on downstream margins resulting from an increase of crude oil feedstock prices,” according to the prospectus.
The increase in profitability from 2016 to 2017 was driven by “fiscal regime changes,” according to the same document. The 2018 net income makes it the most profitable company in the world by a wide margin, according to media reports. However, the bond appears to have started trading at a discount in secondary markets, leading reports to suggest demand was inflated.
A bond, not an IPO
The bond issuance was also linked with the long-planned IPO of Aramco, postponed to 2021. At its core, the main risk of this bond is similar to what has given investors misgivings about the IPO: The kingdom and the oil company are opaque. However, the fixed income format offers some advantages that not present in the equity, including guaranteed cash flow and a limited maturity, both of which probably contributed to the enormous demand reported. For the Saudi company and government, the much lighter disclosure requirements of a bond, compared to an IPO would have been highly appealing.
The fundamental logic of the deal also seems rather convoluted. Aramco is buying SABIC from MbS’s PIF, but MbS is still in charge. The SABIC deal appears to be a means to inject liquidity into MbS, following the demise of the Aramco IPO. The funds are most likely going to be directed towards fulfilling the ambitious economic reform and geopolitical agenda of the Crown Prince.
The bigger picture
The event also prompted criticism that investors have ignored the unorthodox tactics MbS has pursued to consolidate power at home and abroad. At home, MBS has been implicated in the murder of Jamal Khashoggi, according to the Turkish government. The Crown Prince is also reported to have held members of the Saudi royal family hostage at a luxury hotel last year, to wrestle control of what few parts of the country remained beyond his reach in 2018. Internationally, Saudi Arabia also led the coalition that attempted to blockade Qatar, last year. He also appears to have also been involved in devising a strategy that starved thousands of Yemenis to death. Last but not least, he ostensibly kidnapped the prime minister of Lebanon, in order bait Hezbollah, according to late 2017 reports.
Commenting on this deal, Barrons noted that “the young Saudi ruler may mellow with time. But betting on that is even tougher than wagering on the price of oil.”
